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2013-30977

  • Federal Register, Volume 78 Issue 249 (Friday, December 27, 2013)[Federal Register Volume 78, Number 249 (Friday, December 27, 2013)]

    [Notices]

    [Pages 78890-78898]

    From the Federal Register Online via the Government Printing Office [www.gpo.gov]

    [FR Doc No: 2013-30977]

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    COMMODITY FUTURES TRADING COMMISSION

    Comparability Determination for Japan: Certain Transaction-Level

    Requirements

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Notice of Comparability Determination for Certain Requirements

    under the Japanese Laws and Regulations.

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    SUMMARY: The following is the analysis and determination of the

    Commodity Futures Trading Commission (``Commission'') regarding certain

    parts of a request by the Bank of Tokyo-Mitsubishi UFJ, Ltd (``BTMU'')

    that the Commission determine that laws and regulations applicable in

    the Japan provide a sufficient basis for an affirmative finding of

    comparability with respect to the following regulatory obligations

    applicable to swap dealers (``SDs'') and major swap participants

    (``MSPs'') registered with the Commission: (i) Swap trading

    relationship documentation and (ii) daily trading records

    (collectively, the ``Business Conduct Requirements'').

    DATES:

    Effective Date: This determination will become effective

    immediately upon publication in the Federal Register.

    FOR FURTHER INFORMATION CONTACT: Gary Barnett, Director, 202-418-5977,

    gbarnett@cftc.gov, Frank Fisanich, Chief Counsel, 202-418-5949,

    ffisanich@cftc.gov, and Jason Shafer, Special Counsel, 202-418-5097,

    jshafer@cftc.gov, Division of Swap Dealer and Intermediary Oversight,

    Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st

    Street, NW., Washington, DC 20581.

    SUPPLEMENTARY INFORMATION:

    I. Introduction

    On July 26, 2013, the Commission published in the Federal Register

    its ``Interpretive Guidance and Policy Statement Regarding Compliance

    with Certain Swap Regulations'' (``Guidance'').\1\ In the Guidance, the

    Commission set forth its interpretation of the manner in which it

    believes that section 2(i) of the Commodity Exchange Act (``CEA'')

    applies Title VII's swap provisions to activities outside the U.S. and

    informed the public of some of the policies that it expects to follow,

    generally speaking, in applying Title VII and certain Commission

    regulations in contexts covered by section 2(i). Among other matters,

    the Guidance generally described the policy and procedural framework

    under which the Commission would consider a substituted compliance

    program with respect to Commission regulations applicable to entities

    located outside the U.S. Specifically, the Commission addressed a

    recognition program where compliance with a comparable regulatory

    requirement of a foreign jurisdiction would serve as a reasonable

    substitute for compliance with the attendant requirements of the CEA

    and the Commission's regulations promulgated thereunder.

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    \1\ 78 FR 45292 (July 26, 2013). The Commission originally

    published proposed and further proposed guidance on July 12, 2012

    and January 7, 2013, respectively. See Cross-Border Application of

    Certain Swaps Provisions of the Commodity Exchange Act, 77 FR 41214

    (July 12, 2012) and Further Proposed Guidance Regarding Compliance

    with Certain Swap Regulations,78 FR 909 (Jan. 7, 2013).

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    In addition to the Guidance, on July 22, 2013, the Commission

    issued the Exemptive Order Regarding Compliance with Certain Swap

    Regulations (the ``Exemptive Order'').\2\ Among other things, the

    Exemptive Order provided time for the Commission to consider

    substituted compliance with respect to six jurisdictions where non-U.S.

    SDs are currently organized. In this regard, the Exemptive Order

    generally provided non-U.S. SDs and MSPs (and foreign branches of U.S.

    SDs and MSPs) in the six jurisdictions with conditional relief from

    certain requirements of Commission regulations (those referred to as

    ``Transaction-Level Requirements'' in the Guidance) until the earlier

    of December 21, 2013, or 30 days following the issuance of a

    substituted compliance determination.\3\ However, the Commission

    provided only transitional relief from the real-time public reporting

    requirements under part 43 of the Commission's regulations until

    [[Page 78891]]

    September 30, 2013, stating that ``it would not be in the public

    interest to further delay reporting under part 43 . . . .'' \4\

    Similarly, the Commission provided transitional relief only until

    October 10, 2013, from the clearing and swap processing requirements

    (as described in the Guidance), stating that, ``[b]ecause SDs and MSPs

    have been committed to clearing their [credit default swaps] and

    interest rate swaps for many years, and indeed have been voluntarily

    clearing for many years, any further delay of the Commission's clearing

    requirement is unwarranted.'' \5\ The Commission did not make any

    comparability determination with respect to clearing and swap

    processing prior to October 10, 2013, or real-time public reporting

    prior to September 30, 2013.

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    \2\ 78 FR 43785 (July 22, 2013).

    \3\ The Transaction-Level Requirements under the Exemptive Order

    consist of 17 CFR 37.12, 38.11, 23.202, 23.205, 23.400-451, 23.501,

    23.502, 23.503, 23.504, 23.505, 23.506, 23.610, and parts 43 and 50

    of the Commission's regulations.

    \4\ See id. at 43789.

    \5\ See id. at 43790.

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    On September 20, 2013, BTMU submitted a request that the Commission

    determine that laws and regulations applicable in Japan provide a

    sufficient basis for an affirmative finding of comparability with

    respect to certain Transaction-Level Requirements, including the

    Business Conduct Requirements.\6\ (BTMU is referred to herein as the

    ``applicant''). On December 16, 2013, the application was further

    supplemented with corrections and additional materials. The following

    is the Commission's analysis and determination regarding the Business

    Conduct Requirements, as detailed below.

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    \6\ For purposes of this notice, the Business Conduct

    Requirements consist of 17 CFR 23.202 and 23.504.

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    In addition to the Business Conduct Requirements described below,

    the applicant also requested a comparability determination with respect

    to law and regulations applicable in Japan governing trade execution,

    real-time public reporting, clearing, and swap processing.

    With respect to trade execution and real-time reporting, the

    Commission has not made a comparability determination at this time due

    to the Commission's view that although a legislative framework for such

    requirements exists in Japan, detailed regulations with which to

    compare the requirements of the Commission's regulations on trade

    execution and real-time public reporting under such framework are still

    under consideration in Japan. The Commission may address these requests

    in a separate notice at a later date, taking into account further

    developments in the U.S. and Japan.

    With respect to clearing and swap processing, this notice does not

    address Sec. 50.2 (Treatment of swaps subject to a clearing

    requirement), Sec. 50.4 (Classes of swaps required to be cleared),

    Sec. 23.506 (Swap processing and clearing), or Sec. 23.610 (Clearing

    member acceptance for clearing).

    The mandatory clearing requirement in Japan, which is consistent

    with the G20 commitments \7\ and objectives, was implemented in

    November 2012, ahead of other G20 jurisdictions. Japan's clearing

    requirement, at its initial stage, is applied to transactions between

    large domestic financial institutions registered under the Financial

    Instruments and Exchange Act, No. 25 of 1948 (``FIEA''), who are

    members of licensed clearing organizations \8\, for (i) certain credit

    default swaps (i.e., those referencing iTraxx Japan--an investment-

    grade index CDS from 50 Japanese firms); and (ii) certain interest rate

    swaps (i.e., three month or six month Japanese yen LIBOR interest rate

    swaps). According to Japanese authorities, the scope of entities and

    products subject to the clearing requirement in Japan will be expanded

    over the next two years in a phased manner.

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    \7\ In 2009, leaders of the Group of 20 (``G20'')--whose

    membership includes Japan, the United States, and 18 other

    countries--agreed that: (i) OTC derivatives contracts should be

    reported to trade repositories; (ii) all standardized OTC

    derivatives contracts should be cleared through central

    counterparties and traded on exchanges or electronic trading

    platforms, where appropriate, by the end of 2012; and (iii) non-

    centrally cleared contracts should be subject to higher capital

    requirements.

    \8\ Japan Securities Clearing Corporation (``JSCC'') is

    currently the only licensed clearing organization under the FIEA in

    Japan.

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    While the Commission considers that the legal framework in respect

    of clearing and swap processing in Japan is comparable to the U.S

    framework, it also recognizes that there are differences in the scope

    of entities and products between its clearing requirement under section

    2(h)(1)(A) of the CEA and Sec. 50.2 (``the CEA clearing requirement'')

    and the Japanese FIEA clearing requirement, due to differences in

    market structures and conditions. Due to such differences, the

    Commission has not made a comparability determination with respect to

    Sec. Sec. 50.2, 50.4, 23.506, or 23.610 at this time. The Commission

    may address these requests in a separate notice at a later date, taking

    into account further developments in the U.S. and Japan.

    The Commission notes that its Division of Clearing and Risk has

    granted certain no-action relief from the CEA clearing requirement to

    qualified clearing participants of JSCC. Pursuant to such no-action

    relief, clearing participants of JSCC that are subject to Commission

    regulation 50.2, as well as parents and affiliates of such

    participants, may continue clearing yen-denominated interest rate swaps

    at JSCC instead of at a Commission-registered derivatives clearing

    organization (``DCO''). Further, JSCC is in the process of registering

    with the Commission as a DCO. Upon JSCC's registration, a Japanese SD

    could comply with both the CEA and FIEA clearing requirements by

    clearing relevant swaps at JSCC.

    II. Background

    On July 21, 2010, President Obama signed the Dodd-Frank Wall Street

    Reform and Consumer Protection Act \9\ (``Dodd-Frank Act'' or ``Dodd-

    Frank''), which, in Title VII, established a new regulatory framework

    for swaps.

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    \9\ Public Law 111-203, 124 Stat. 1376 (2010).

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    Section 722(d) of the Dodd-Frank Act amended the CEA by adding

    section 2(i), which provides that the swap provisions of the CEA

    (including any CEA rules or regulations) apply to cross-border

    activities when certain conditions are met, namely, when such

    activities have a ``direct and significant connection with activities

    in, or effect on, commerce of the United States'' or when they

    contravene Commission rules or regulations as are necessary or

    appropriate to prevent evasion of the swap provisions of the CEA

    enacted under Title VII of the Dodd-Frank Act.\10\

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    \10\ 7 U.S.C. 2(i).

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    In the three years since its enactment, the Commission has

    finalized 68 rules and orders to implement Title VII of the Dodd-Frank

    Act. The finalized rules include those promulgated under section 4s of

    the CEA, which address registration of SDs and MSPs and other

    substantive requirements applicable to SDs and MSPs. With few

    exceptions, the delayed compliance dates for the Commission's

    regulations implementing such section 4s requirements applicable to SDs

    and MSPs have passed and new SDs and MSPs are now required to be in

    full compliance with such regulations upon registration with the

    Commission.\11\ Notably, the requirements under Title VII of the Dodd-

    Frank Act related to SDs and MSPs by their terms apply to all

    registered SDs and MSPs, irrespective of where they are located, albeit

    subject to the limitations of CEA section 2(i).

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    \11\ The compliance dates are summarized on the Compliance Dates

    page of the Commission's Web site. (http://www.cftc.gov/LawRegulation/DoddFrankAct/ComplianceDates/index.htm.)

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    To provide guidance as to the Commission's views regarding the

    scope

    [[Page 78892]]

    of the cross-border application of Title VII of the Dodd-Frank Act, the

    Commission set forth in the Guidance its interpretation of the manner

    in which it believes that Title VII's swap provisions apply to

    activities outside the U.S. pursuant to section 2(i) of the CEA. Among

    other matters, the Guidance generally describes the policy and

    procedural framework under which the Commission would consider a

    substituted compliance program with respect to Commission regulations

    applicable to entities located outside the U.S. Specifically, the

    Commission established a recognition program where compliance with a

    comparable regulatory requirement of a foreign jurisdiction would serve

    as a reasonable substitute for compliance with the attendant

    requirements of the CEA and the Commission's regulations. With respect

    to the standards forming the basis for any determination of

    comparability (``comparability determination'' or ``comparability

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    finding''), the Commission stated:

    In evaluating whether a particular category of foreign

    regulatory requirement(s) is comparable and comprehensive to the

    applicable requirement(s) under the CEA and Commission regulations,

    the Commission will take into consideration all relevant factors,

    including but not limited to, the comprehensiveness of those

    requirement(s), the scope and objectives of the relevant regulatory

    requirement(s), the comprehensiveness of the foreign regulator's

    supervisory compliance program, as well as the home jurisdiction's

    authority to support and enforce its oversight of the registrant. In

    this context, comparable does not necessarily mean identical.

    Rather, the Commission would evaluate whether the home

    jurisdiction's regulatory requirement is comparable to and as

    comprehensive as the corresponding U.S. regulatory

    requirement(s).\12\

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    \12\ 78 FR 45342-45345.

    Upon a comparability finding, consistent with CEA section 2(i) and

    comity principles, the Commission's policy generally is that eligible

    entities may comply with a substituted compliance regime, subject to

    any conditions the Commission places on its finding, and subject to the

    Commission's retention of its examination authority and its enforcement

    authority.\13\

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    \13\ See the Guidance, 78 FR 45342-44.

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    In this regard, the Commission notes that a comparability

    determination cannot be premised on whether an SD or MSP must disclose

    comprehensive information to its regulator in its home jurisdiction,

    but rather on whether information relevant to the Commission's

    oversight of an SD or MSP would be directly available to the Commission

    and any U.S. prudential regulator of the SD or MSP.\14\ The

    Commission's direct access to the books and records required to be

    maintained by SD or MSP registered with the Commission is a core

    requirement of the CEA \15\ and the Commission's regulations,\16\ and

    is a condition to registration.\17\

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    \14\ Under Sec. Sec. 23.203 and 23.606, all records required by

    the CEA and the Commission's regulations to be maintained by a

    registered SD or MSP shall be maintained in accordance with

    Commission regulation 1.31 and shall be open for inspection by

    representatives of the Commission, the United States Department of

    Justice, or any applicable prudential regulator.

    In its Final Exemptive Order Regarding Compliance with Certain

    Swap Regulations, 78 FR 858 (Jan. 7, 2013), the Commission noted

    that an applicant for registration as a SD or MSP must file a Form

    7-R with the National Futures Association and that Form 7-R was

    being modified at that time to address existing blocking, privacy,

    or secrecy laws of foreign jurisdictions that applied to the books

    and records of SDs and MSPs acting in those jurisdictions. See id.

    at 871-72 n. 107. The modifications to Form 7-R were a temporary

    measure intended to allow SDs and MSPs to apply for registration in

    a timely manner in recognition of the existence of the blocking,

    privacy, and secrecy laws. In the Guidance, the Commission clarified

    that the change to Form 7-R impacts the registration application

    only and does not modify the Commission's authority under the CEA

    and its regulations to access records held by registered SDs and

    MSPs. Commission access to a registrant's books and records is a

    fundamental regulatory tool necessary to properly monitor and

    examine each registrant's compliance with the CEA and the

    regulations adopted pursuant thereto. The Commission has maintained

    an ongoing dialogue on a bilateral and multilateral basis with

    foreign regulators and with registrants to address books and records

    access issues and may consider appropriate measures where requested

    to do so.

    \15\ See e.g., sections 4s(f)(1)(C), 4s(j)(3) and (4) of the

    CEA.

    \16\ See e.g., Sec. Sec. 23.203(b) and 23.606.

    \17\ See supra note 13.

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    III. Regulation of SDs and MSPs in Japan

    As represented to the Commission by the applicant, swap activities

    in Japan may be governed by the Banking Act of Japan, No. 59 of 1981

    (``Banking Act''), covering banks and bank holding companies, and the

    FIEA, covering, among others, Financial Instrument Business Operators

    (``FIBOs'') and Registered Financial Institutions (``RFIs''). The

    Japanese Prime Minister delegated broad authority to implement these

    laws to the Japanese Financial Services Agency (``JFSA''). Pursuant to

    this authority, the JFSA has promulgated the Order for Enforcement,\18\

    Cabinet Office Ordinance,\19\ Supervisory Guidelines \20\ and

    Inspection Manuals.\21\ The Securities and Exchange Surveillance

    Commission (``SESC'') is within the JFSA and has promulgated, among

    other things, the Inspection Manual for FIBOs.

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    \18\ Order for Enforcement of the Banking Act and Order for

    Enforcement of the Financial Instruments and Exchange Act.

    \19\ Cabinet Office Ordinance on Financial Instruments Business

    (``FIB Ordinance'') and Cabinet Office Ordinance on Regulation of

    OTC Derivatives Transaction.

    \20\ Comprehensive Guideline for Supervision of Major Banks,

    etc.(``Supervisory Guideline for banks'') and Comprehensive

    Guideline for Supervision of Financial Instruments Business

    Operators, etc.(``Supervisory Guideline for FIBOs'').

    \21\ Inspection Manual for Deposit Taking Institutions

    (``Inspection Manual for banks''), consisting of the Checklist for

    Business Management (Governance), Checklist for Legal Compliance,

    Checklist for Customer Protection Management, Checklist for Credit

    Risk Management, Checklist for Market Risk Management, Checklist for

    Liquidity Risk Management, Checklist for Operational Risk

    Management, etc.

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    These requirements supplement the requirements of the Banking Act

    and FIEA with a more proscriptive direction as to the particular

    structural features or responsibilities that internal compliance

    functions must maintain.

    In general, banks are subject to the Banking Act, relevant laws and

    regulations for banks, the Supervisory Guideline for banks, and the

    Inspection Manual for banks, while FIBOs are subject to the FIEA,

    relevant laws and regulations for FIBOs, Supervisory Guideline for

    FIBOs, and Inspection Manual for FIBOs.

    Pursuant to Article 29 of the FIEA, any person that engages in

    trade activities that constitute ``Financial Instruments Business''--

    which, among other things, includes over-the-counter transactions in

    derivatives (``OTC derivatives'') or intermediary, brokerage (excluding

    brokerage for clearing of securities) or agency services therefor

    \22\--must register under the FIEA as a FIBO. Banks that conduct

    specified activities in the course of trade, including OTC derivatives,

    must register under the FIEA as RFIs pursuant to Article 33-2 of the

    FIEA. Banks registered as RFIs are required to comply with relevant

    laws and regulations for FIBOs regarding specified activities. Failure

    to comply with any relevant laws and regulations, Supervisory

    Guidelines or Inspection Manuals would subject the applicant to

    potential sanctions or corrective measures.

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    \22\ See Article 2(8)(iv) of the FIEA.

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    The applicant is a licensed bank in Japan that is also registered

    as an RFI under the supervision of the JFSA. In addition, the applicant

    is a member of several self-regulatory organizations, including the

    Japanese Securities

    [[Page 78893]]

    Dealers Association (``JSDA''). The JSDA is a ``Financial Instruments

    Firms Association'' authorized under FIEA by the Prime Minister of

    Japan.\23\

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    \23\ Because the applicant's request and the Commission's

    determinations herein are based on the comparability of Japanese

    requirements applicable to banks, FIBOs, and RFIs, an SD or MSP that

    is not a bank, FIBO, or RFI, or is otherwise not subject to the

    requirements applicable to banks, FIBOs, and RFIs upon which the

    Commission bases its determinations, may not be able to rely on the

    Commission's comparability determinations herein.

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    IV. Comparable and Comprehensiveness Standard

    The Commission's comparability analysis will be based on a

    comparison of specific foreign requirements against the specific

    related CEA provisions and Commission regulations as categorized and

    described in the Guidance. As explained in the Guidance, within the

    framework of CEA section 2(i) and principles of international comity,

    the Commission may make a comparability determination on a requirement-

    by-requirement basis, rather than on the basis of the foreign regime as

    a whole.\24\ In making its comparability determinations, the Commission

    may include conditions that take into account timing and other issues

    related to coordinating the implementation of reform efforts across

    jurisdictions.\25\

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    \24\ 78 FR 45343.

    \25\ 78 FR 45343.

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    In evaluating whether a particular category of foreign regulatory

    requirement(s) is comparable and comprehensive to the corollary

    requirement(s) under the CEA and Commission regulations, the Commission

    will take into consideration all relevant factors, including, but not

    limited to:

    The comprehensiveness of those requirement(s),

    The scope and objectives of the relevant regulatory

    requirement(s),

    The comprehensiveness of the foreign regulator's

    supervisory compliance program, and

    The home jurisdiction's authority to support and enforce

    its oversight of the registrant.\26\

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    \26\ 78 FR 45343.

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    In making a comparability determination, the Commission takes an

    ``outcome-based'' approach. An ``outcome-based'' approach means that

    when evaluating whether a foreign jurisdiction's regulatory

    requirements are comparable to, and as comprehensive as, the corollary

    areas of the CEA and Commission regulations, the Commission ultimately

    focuses on regulatory outcomes (i.e., the home jurisdiction's

    requirements do not have to be identical).\27\ This approach recognizes

    that foreign regulatory systems differ and their approaches vary and

    may differ from how the Commission chose to address an issue, but that

    the foreign jurisdiction's regulatory requirements nonetheless achieve

    the regulatory outcome sought to be achieved by a certain provision of

    the CEA or Commission regulation.

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    \27\ 78 FR 45343.

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    In doing its comparability analysis the Commission may determine

    that no comparability determination can be made \28\ and that the non-

    U.S. SD or non-U.S. MSP, U.S. bank that is a SD or MSP with respect to

    its foreign branches, or non-registrant, to the extent applicable under

    the Guidance, may be required to comply with the CEA and Commission

    regulations.

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    \28\ A finding of comparability may not be possible for a number

    of reasons, including the fact that the foreign jurisdiction has not

    yet implemented or finalized particular requirements.

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    The starting point in the Commission's analysis is a consideration

    of the regulatory objectives of the foreign jurisdiction's regulation

    of swaps and swap market participants. As stated in the Guidance,

    jurisdictions may not have swap specific regulations in some areas, and

    instead have regulatory or supervisory regimes that achieve comparable

    and comprehensive regulation to the Dodd-Frank Act requirements, but on

    a more general, entity-wide, or prudential, basis.\29\ In addition,

    portions of a foreign regulatory regime may have similar regulatory

    objectives, but the means by which these objectives are achieved with

    respect to swap market activities may not be clearly defined, or may

    not expressly include specific regulatory elements that the Commission

    concludes are critical to achieving the regulatory objectives or

    outcomes required under the CEA and the Commission's regulations. In

    these circumstances, the Commission will work with the regulators and

    registrants in these jurisdictions to consider alternative approaches

    that may result in a determination that substituted compliance

    applies.\30\

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    \29\ 78 FR 45343.

    \30\ As explained in the Guidance, such ``approaches used will

    vary depending on the circumstances relevant to each jurisdiction.

    One example would include coordinating with the foreign regulators

    in developing appropriate regulatory changes or new regulations,

    particularly where changes or new regulations already are being

    considered or proposed by the foreign regulators or legislative

    bodies. As another example, the Commission may, after consultation

    with the appropriate regulators and market participants, include in

    its substituted compliance determination a description of the means

    by which certain swaps market participants can achieve substituted

    compliance within the construct of the foreign regulatory regime.

    The identification of the means by which substituted compliance is

    achieved would be designed to address the regulatory objectives and

    outcomes of the relevant Dodd-Frank Act requirements in a manner

    that does not conflict with a foreign regulatory regime and reduces

    the likelihood of inconsistent regulatory obligations. For example,

    the Commission may specify that [SDs] and MSPs in the jurisdiction

    undertake certain recordkeeping and documentation for swap

    activities that otherwise is only addressed by the foreign

    regulatory regime with respect to financial activities generally. In

    addition, the substituted compliance determination may include

    provisions for summary compliance and risk reporting to the

    Commission to allow the Commission to monitor whether the regulatory

    outcomes are being achieved. By using these approaches, in the

    interest of comity, the Commission would seek to achieve its

    regulatory objectives with respect to the Commission's registrants

    that are operating in foreign jurisdictions in a manner that works

    in harmony with the regulatory interests of those jurisdictions.''

    78 FR 45343-44.

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    Finally, the Commission generally will rely on an applicant's

    description of the laws and regulations of the foreign jurisdiction in

    making its comparability determination. The Commission considers an

    application to be a representation by the applicant that the laws and

    regulations submitted are in full force and effect, that the

    description of such laws and regulations is accurate and complete, and

    that, unless otherwise noted, the scope of such laws and regulations

    encompasses the swaps activities \31\ of SDs and MSPs \32\ in the

    relevant jurisdictions.\33\ Further, as stated in the Guidance, the

    Commission expects that an applicant would notify the Commission of any

    [[Page 78894]]

    material changes to information submitted in support of a comparability

    determination (including, but not limited to, changes in the relevant

    supervisory or regulatory regime) as, depending on the nature of the

    change, the Commission's comparability determination may no longer be

    valid.\34\

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    \31\ ``Swaps activities'' is defined in Commission regulation

    23.600(a)(7) to mean, ``with respect to a registrant, such

    registrant's activities related to swaps and any product used to

    hedge such swaps, including, but not limited to, futures, options,

    other swaps or security-based swaps, debt or equity securities,

    foreign currency, physical commodities, and other derivatives.'' The

    Commission's regulations under Part 23 (17 CFR Part 23) are limited

    in scope to the swaps activities of SDs and MSPs.

    \32\ No SD or MSP that is not legally required to comply with a

    law or regulation determined to be comparable may voluntarily comply

    with such law or regulation in lieu of compliance with the CEA and

    the relevant Commission regulation. Each SD or MSP that seeks to

    rely on a comparability determination is solely responsible for

    determining whether it is legally required to comply with the laws

    and regulations found comparable. Currently, there are no MSPs

    organized outside the U.S. and the Commission therefore cautions any

    non-financial entity organized outside the U.S. and applying for

    registration as an MSP to carefully consider whether the laws and

    regulations determined to be comparable herein are applicable to

    such entity.

    \33\ The Commission has provided the relevant foreign

    regulator(s) with opportunities to review and correct the

    applicant's description of such laws and regulations on which the

    Commission will base its comparability determination. The Commission

    relies on the accuracy and completeness of such review and any

    corrections received in making its comparability determinations. A

    comparability determination based on an inaccurate description of

    foreign laws and regulations may not be valid.

    \34\ 78 FR 45345.

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    The Guidance provided a detailed discussion of the Commission's

    policy regarding the availability of substituted compliance \35\ for

    the Business Conduct Requirements.

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    \35\ See 78 FR 45348-50. The Commission notes that registrants

    and other market participants are responsible for determining

    whether substituted compliance is available pursuant to the Guidance

    based on the comparability determination contained herein (including

    any conditions or exceptions), and its particular status and

    circumstances.

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    V. Supervisory Arrangement

    In the Guidance, the Commission stated that, in connection with a

    determination that substituted compliance is appropriate, it would

    expect to enter into an appropriate memorandum of understanding

    (``MOU'') or similar arrangement \36\ with the relevant foreign

    regulator(s). Although existing arrangements would indicate a foreign

    regulator's ability to cooperate and share information, ``going

    forward, the Commission and relevant foreign supervisor(s) would need

    to establish supervisory MOUs or other arrangements that provide for

    information sharing and cooperation in the context of supervising SDs

    and MSPs.''\37\

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    \36\ An MOU is one type of arrangement between or among

    regulators. Supervisory arrangements could include, as appropriate,

    cooperative arrangements that are memorialized and executed as

    addenda to existing MOUs or, for example, as independent bilateral

    arrangements, statements of intent, declarations, or letters.

    \37\ 78 FR 45344.

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    The Commission is in the process of developing its registration and

    supervision regime for provisionally-registered SDs and MSPs. This new

    initiative includes setting forth supervisory arrangements with

    authorities that have joint jurisdiction over SDs and MSPs that are

    registered with the Commission and subject to U.S. law. Given the

    developing nature of the Commission's regime and the fact that the

    Commission has not negotiated prior supervisory arrangements with

    certain authorities, the negotiation of supervisory arrangements

    presents a unique opportunity to develop close working relationships

    between and among authorities, as well as highlight any potential

    issues related to cooperation and information sharing.

    Accordingly, the Commission is negotiating such a supervisory

    arrangement with each applicable foreign regulator of an SD or MSP. The

    Commission expects that the arrangement will establish expectations for

    ongoing cooperation, address direct access to information,\38\ provide

    for notification upon the occurrence of specified events, memorialize

    understandings related to on-site visits,\39\ and include protections

    related to the use and confidentiality of non-public information shared

    pursuant to the arrangement.

    ---------------------------------------------------------------------------

    \38\ Section 4s(j)(3) and (4) of the CEA and Commission

    regulation 23.606 require a registered SD or MSP to make all records

    required to be maintained in accordance with Commission regulation

    1.31 available promptly upon request to, among others,

    representatives of the Commission. See also 7 U.S.C. Sec. 6s(f); 17

    CFR 23.203. In the Guidance, the Commission states that it

    ``reserves this right to access records held by registered [SDs] and

    MSPs, including those that are non-U.S. persons who may comply with

    the Dodd-Frank recordkeeping requirement through substituted

    compliance.'' 78 FR 45345 n. 472; see also id. at 45342 n. 461

    (affirming the Commission's authority under the CEA and its

    regulations to access books and records held by registered SDs and

    MSPs as ``a fundamental regulatory tool necessary to properly

    monitor and examine each registrant's compliance with the CEA and

    the regulations adopted pursuant thereto'').

    \39\ The Commission retains its examination authority, both

    during the application process as well as upon and after

    registration of an SD or MSP. See 78 FR 45342 (stating Commission

    policy that ``eligible entities may comply with a substituted

    compliance regime under certain circumstances, subject, however, to

    the Commission's retention of its examination authority'') and 45344

    n. 471 (stating that the ``Commission may, as it deems appropriate

    and necessary, conduct an on-site examination of the applicant'').

    ---------------------------------------------------------------------------

    These arrangements will establish a roadmap for how authorities

    will consult, cooperate, and share information. As with any such

    arrangement, however, nothing in these arrangements will supersede

    domestic laws or resolve potential conflicts of law, such as the

    application of domestic secrecy or blocking laws to regulated entities.

    VI. Comparability Determination and Analysis

    The following section describes the requirements imposed by

    specific sections of the CEA and the Commission's regulations for the

    Business Conduct Requirements in the ``risk mitigation and

    transparency'' category that are the subject of this comparability

    determination and the Commission's regulatory objectives with respect

    to such requirements. Immediately following a description of the

    requirement(s) and regulatory objective(s) of the specific Business

    Conduct Requirements that the applicant submitted for a comparability

    determination, the Commission provides a description of the foreign

    jurisdiction's comparable laws, regulations, or rules and whether such

    laws, regulations, or rules meet the applicable regulatory objective.

    The Commission's determinations in this regard and the discussion

    in this section are intended to inform the public of the Commission's

    views regarding whether the foreign jurisdiction's laws, regulations,

    or rules may be comparable to and as comprehensive as those

    requirements in the Dodd-Frank Act (and Commission regulations

    promulgated thereunder) and therefore, may form the basis of

    substituted compliance. In turn, the public (in the foreign

    jurisdiction, in the United States, and elsewhere) retains its ability

    to present facts and circumstances that would inform the determinations

    set forth in this release.

    As was stated in the Guidance, the Commission understands the

    complex and dynamic nature of the global swap market and the need to

    take an adaptable approach to cross-border issues, particularly as it

    continues to work closely with foreign regulators to address potential

    conflicts with respect to each country's respective regulatory regime.

    In this regard, the Commission may review, modify, or expand the

    determinations herein in light of comments received and future

    developments.

    A. Swap Trading Relationship Documentation (Sec. 23.504)

    Commission Requirement: Section 4s(i) of the CEA requires each SD

    and MSP to conform to Commission standards for the timely and accurate

    confirmation, processing, netting, documentation, and valuation of

    swaps.\40\ Pursuant to this requirement, the Commission adopted Sec.

    23.504.

    ---------------------------------------------------------------------------

    \40\ See 7 U.S.C. Sec. 6s(i).

    ---------------------------------------------------------------------------

    Pursuant to Sec. 23.504(a), SDs and MSPs must have policies and

    procedures reasonably designed to ensure that the SD or MSP enters into

    swap trading relationship documentation with each counterparty prior to

    executing any swap with such counterparty. Such requirement does not

    apply to cleared swaps.

    Pursuant to Sec. 23.504(b), SDs and MSPs must, at a minimum,

    document terms relating to:

    Payment obligations;

    Netting of payments;

    Events of default or other termination events;

    Netting of obligations upon termination;

    Transfer of rights/obligations;

    [[Page 78895]]

    Governing law;

    Valuation--must be able to value swaps in a predictable

    and objective manner--complete and independently verifiable methodology

    for valuation;

    Dispute resolution procedures; and

    Credit support arrangements with initial/variation margin

    at least as high as set for SD/MSPs or prudential regulator

    (identifying haircuts and class of eligible assets).

    Regulatory Objective: Through Commission regulation 23.504, the

    Commission seeks to reduce the legal, operational, counterparty credit,

    and market risk that can arise from undocumented swaps or undocumented

    terms of swaps. Inadequate documentation of swap transactions is more

    likely to result in collateral and legal disputes, thereby exposing

    counterparties to significant counterparty credit risk.

    In particular, documenting agreements regarding valuation is

    critical because, as the Commission has noted, the ability to determine

    definitively the value of a swap at any given time lies at the center

    of many of the OTC derivatives market reforms contained in the Dodd-

    Frank Act and is a cornerstone of risk management. With respect to

    other SDs/MSPs and financial entities, or upon request of any other

    counterparty, the regulation requires agreement on the process

    (including alternatives and dispute resolution procedures) for

    determining the value of each swap for the duration of such swap for

    purposes of complying with the Commission's margin and risk management

    requirements, with such valuations based on objective criteria to the

    extent practicable.

    Comparable Japanese Law and Regulations: The applicant has

    represented to the Commission that the following provisions of law and

    regulations applicable in Japan are in full force and effect in Japan,

    and comparable to and as comprehensive as section 4s(i) of the CEA and

    Commission regulation 23.504.

    Article 37-3 of the FIEA and Article 99 of the FIB Ordinance

    requires RFIs/FIBOs that intend to conclude a swap transaction to

    deliver to their customer documentation that outlines all relevant

    terms of the swap transaction. Such documentation must be delivered

    prior to execution in order to ``ensure that the customer can make a

    decision on whether to conclude the contract with a full understanding

    on the content[hellip]of the contract.'' In addition to describing all

    relevant terms of the transactions, the pre-execution documentation

    must identify:

    How the obligations arising from the swap transactions

    will be performed;

    Settlement terms;

    Events on default or termination;

    The name or trade name of the designated dispute

    resolution organization (if any), or the details of the grievances

    settlement procedures and dispute resolution measures; and

    The types of and computation method of the amount of

    customer margins or other guarantee money which a customer is required

    to deposit regarding the swap transactions, the types of an prices

    applicable to properties, etc. which may be deposited as customer

    margins or other guarantee money and matters equivalent thereto, and

    how customer margins or other guarantee money will be deposited by or

    returned to the customer.

    II-1-2.1(5)(i) and (ii) of the Inspection Manual for FIBOs requires

    RFIs/FIBOs to develop internal controls to verify compliance with these

    documentation requirements, including a system to verify that the

    written documents were issued before the agreements were concluded.

    Such internal controls must be approved by the RFI's/FIBO's board of

    directors. In addition, pursuant to IV(1) of the Checklist for Business

    Risk Management (Governance) of the Inspection Manual for banks, banks

    are required to develop an external audit system to review the

    effectiveness of these internal controls on at least an annual basis.

    II-1-1.4(1) of the Inspection Manual for FIBOs requires a RFI/FIBO's

    board of directors to establish an internal audit system to verify the

    appropriateness and effectiveness of these internal controls by setting

    up a highly independent internal audit division.

    Commission Determination: The Japanese standards specified above

    require OTC derivative contracts entered into between RFIs/FIBOs and

    their customers to be confirmed in writing, which corresponds to the

    requirements of Commission regulation 23.504(b)(2).

    Pursuant to the FIEA, RFIs and FIBOs are required to document the

    computation method of the customer margins or other guarantee money

    that the customer is required to deposit regarding the swap

    transactions. This corresponds with Commission regulation 23.504(b)(3)

    and (b)(4)(i), which requires SDs and MSPs to engage in daily valuation

    with other SDs and MSPs, and financial entities.

    Under the Japanese standards, when concluding OTC derivative

    contracts with each other, counterparties must have agreed detailed

    procedures and processes in relation to: (a) identification, recording,

    and monitoring of disputes relating to the recognition or valuation of

    the contracts and to the exchange of collateral between counterparties,

    and (b) the resolution of disputes in a timely manner. These aspects of

    the Japanese standards correspond to the valuation documentation

    requirements under Commission regulation 23.504(b)(4), which also

    require use of market transactions for valuations to the extent

    practicable, or other objective criteria, and an agreement on detailed

    processes for valuation dispute resolution for purposes of complying

    with margin requirements.

    Generally identical in intent to Sec. 23.504(b)(2), (3), and (4),

    the Japanese confirmation and valuation documentation requirements are

    designed to reduce the legal, operational, counterparty credit, and

    market risk that can arise from undocumented transactions or terms,

    reducing the risk of collateral and legal disputes, and exposure of

    counterparties to significant counterparty credit risk.

    Moreover, generally identical in intent to Sec. 23.504(a)(2),

    (b)(1), (c), and (d), the Japanese standards require that SDs and MSPs

    establish policies and procedures, including audit procedures, approved

    in writing by senior management of the SD or MSP, reasonably designed

    to ensure that they have entered into swap trading relationship

    documentation in compliance with appropriate standards with each

    counterparty prior to or contemporaneously with entering into a swap

    transaction with such counterparty.

    Based on the foregoing and the representations of the applicant,

    the Commission finds the confirmation and valuation documentation

    requirements of the Japanese standards specified above are comparable

    to and as comprehensive as the swap trading relationship documentation

    requirements of Commission regulations 23.504(a)(2), (b)(1), (2), (3),

    and (4), (c), and (d).

    The foregoing comparability determination does not extend to the

    requirement that such documentation include notice of the status of the

    counterparty under the orderly liquidation procedures of Title II of

    the Dodd-Frank Act, and the effect of clearing on swaps executed

    bilaterally.\41\

    ---------------------------------------------------------------------------

    \41\ See Sec. 23.504(b)(5) and (6).

    ---------------------------------------------------------------------------

    [[Page 78896]]

    B. Daily Trading Records (Sec. 23.202)

    Commission Requirement: Section 4s(g)(1) of the CEA and Commission

    regulation 23.202 generally require that SDs and MSPs retain daily

    trading records for swaps and related cash and forward transactions,

    including:

    Documents on which transaction information is originally

    recorded;

    All information necessary to conduct a comprehensive and

    accurate trade reconstruction;

    Pre-execution trade information including records of all

    oral and written communications concerning quotes, solicitations, bids,

    offers, instructions, trading, and prices that lead to the execution of

    a swap or related cash and forward transactions, whether communicated

    by phone, fax, instant messaging, chat rooms, email, mobile device, or

    other digital or electronic media;

    Reliable timing date for the initiation of a trade;

    A record of the time, to the nearest minute using

    Coordinated Universal Time (UTC), of each quotation provided or

    received prior to trade execution;

    Execution trade information including the terms of each

    swap and related cash or forward transaction, terms regarding payment

    or settlement, initial and variation margin requirements, option

    premiums, and other cash flows;

    The trade ticket for each swap and related cash or forward

    transaction;

    The date and time of execution of each swap and related

    cash or forward transaction to the nearest minute using UTC;

    The identity of the counterparty and the date and title of

    the agreement to which each swap is subject, including any swap trading

    relationship documentation and credit support arrangements;

    The product name and identifier, the price at which the

    swap was executed, and the fees, commissions and other expenses

    applicable;

    Post-execution trade information including records of

    confirmation, termination, novation, amendment, assignment, netting,

    compression, reconciliation, valuation, margining, collateralization,

    and central clearing;

    The time of confirmation to the nearest minute using UTC;

    Ledgers of payments and interest received, moneys borrowed

    and loaned, daily swap valuations, and daily calculation of current and

    potential future exposure for each counterparty;

    Daily calculation of initial and variation margin

    requirements;

    Daily calculation of the value of collateral, including

    haircuts;

    Transfers of collateral, including substitutions, and the

    types of collateral transferred; and

    Credits and debits for each counterparty's account.

    Daily trading records must be maintained in a form and manner

    identifiable and searchable by transaction and counterparty, and

    records of swaps must be maintained for the duration of the swap plus

    five years, and voice recordings for one year. Records must be

    ``readily accessible'' for the first two years of the five year

    retention period (consistent with Sec. 1.31).

    Regulatory Objective: Through Sec. 23.202, the Commission seeks to

    ensure that an SD's or MSP's records include all information necessary

    to conduct a comprehensive and accurate trade reconstruction for each

    swap, which necessarily requires the records to be identifiable by

    transaction and counterparty. Complete and accurate trade

    reconstruction is critical for both regulatory oversight and

    investigations of illegal activity pursuant to the Commission's

    enforcement authority. The Commission believes that a comprehensive and

    accurate trade reconstruction requires records of pre-execution,

    execution, and post-execution trade information.

    Comparable Japanese Law and Regulations: The applicant has

    represented to the Commission that the following provisions of law and

    regulations applicable in Japan are in full force and effect in Japan,

    and comparable to and as comprehensive as section 4s(g) of the CEA and

    Commission regulation 23.202.

    Article 156-64(1) and (2) of the FIEA, II-2-1 2.(1)(iv) of the FIBO

    Inspection Manual, and II.1.1(3)(iii) of the Checklist for Customer

    Protection Management, requires a RFI/FIBO to retain records for swaps

    and related cash and forward transactions, including:

    Documents prior to the conclusion of a contract that

    outline the terms of a swap transaction;

    24-hour audio recordings of trading by dealers;

    Order tickets for each swap and related cash or forward

    transactions;

    The date and time the order was accepted and the date and

    time the order was filled, both of which must be recorded by time of

    day, of each swap and related cash or forward transaction;

    Product name (items to be listed in the books and

    documents may be entered using codes, brevity codes or any other

    symbols that have been standardized by the relevant RFI/FIBO);

    Price at which the swap was executed, and the fees,

    commissions and other expenses applicable;

    Documents upon conclusion of a contract that contain an

    outline of swap transactions, the name of the customer, as well as

    trading daily books and customer account ledgers that contain

    transaction histories;

    Ledgers of the customer fees, margin transaction payment

    interest, margin transactions receipt interest, security borrowing fee

    or security lending fee;

    Guarantee money on deposit, customer margin, trade margin

    or other matters regarding collateral property (the distinction between

    cash or security, etc. deposited as margin, date of receipt or date of

    return, issue name, volume or amount of money); and

    Debit or credit of money and balances of all accounts.

    Pursuant to the OTC Derivative Ordinance, FIEA Enforcement Order,

    FIB Ordinance, and the Supervisory Guideline for FIBOs, records of

    swaps of RFIs/FIBOs must be in writing and maintained for a period from

    5 to 10 years, depending on the specific record at issue. III-16(iv) of

    the Checklist for Market Risk Management of the Inspection Manual for

    banks assesses whether voice recordings are maintained for all traders

    on a 24-hour basis, recorded tapes are stored for a prescribed period

    of time, and retained ``under the control of an organization segregated

    from the market and back-office divisions.''.

    III-2-(1)(viii) in Exhibit 1 of the Checklist for Operational Risk

    Management of the Inspection Manual for banks and II-2-1.2(1) of the

    Inspection Manual for FIBOs assesses whether documentary evidence such

    as transaction data are stored for a period specified by the internal

    rules and operational procedures, etc., but at least one year.

    In addition, III-3-10-2(3) (iv) of Supervisory Guideline for banks

    specifically requires banks to have the personnel and systems to

    respond in a timely and appropriate manner to inspections and

    supervision provided by overseas regulatory authorities. In view of

    maintaining direct dialog and smooth communications with the relevant

    overseas regulatory authorities, this provision ensures the

    establishment of a reporting system which enables timely and

    appropriate reporting.

    Similarly, IV-5-2(i) of Supervisory Guideline for FIBOs would

    ensure the availability of information to a regulator promptly upon

    request. Under this provision, the JFSA assesses whether a designated

    parent company of a FIBO

    [[Page 78897]]

    ensures group-wide compliance with the relevant laws, regulations and

    rules of each country in which it does business by establishing an

    appropriate control environment for legal compliance in accordance with

    the size of its overseas bases and the characteristics of its business

    operations.

    The JFSA has informed the Commission that, in the process of its

    oversight and enforcement of the foregoing Japanese standards for FIBOs

    and RFIs, any SD or MSP would be subject to such standards and required

    to record pre-execution trade information, communicated by not only

    telephone but also other forms of communication comparable to those

    listed in Sec. 23.202(a)(1) and (b)(1).

    Commission Determination: The Commission finds that compliance with

    Japanese standards would enable the relevant competent authority to

    conduct a comprehensive and accurate trade reconstruction for each

    swap, which the Commission finds generally meets the regulatory

    objective of Sec. 23.202.

    In addition, the Commission finds that the Japanese standards

    specified above would ensure Commission access to the required books

    and records of SDs and MSPs by requiring personnel and systems

    necessary to respond in a timely and appropriate manner to inspections

    and supervision provided by overseas regulatory authorities.

    Based on the foregoing and the representations of the applicant,

    the Commission hereby determines that the daily trading records

    requirements of Japan's standards are comparable to and as

    comprehensive as Sec. 23.202.

    Issued in Washington, DC on December 20, 2013, by the

    Commission.

    Melissa D. Jurgens,

    Secretary of the Commission.

    Appendices to Comparability Determination for Japan: Certain

    Transaction-Level Requirements

    Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Chilton and

    Wetjen voted in the affirmative. Commissioner O'Malia voted in the

    negative.

    Appendix 2--Statement of Chairman Gary Gensler and Commissioners

    Chilton and Wetjen

    We support the Commission's approval of broad comparability

    determinations that will be used for substituted compliance

    purposes. For each of the six jurisdictions that has registered swap

    dealers, we carefully reviewed each regulatory provision of the

    foreign jurisdictions submitted to us and compared the provision's

    intended outcome to the Commission's own regulatory objectives. The

    resulting comparability determinations for entity-level requirements

    permit non-U.S. swap dealers to comply with regulations in their

    home jurisdiction as a substitute for compliance with the relevant

    Commission regulations.

    These determinations reflect the Commission's commitment to

    coordinating our efforts to bring transparency to the swaps market

    and reduce its risks to the public. The comparability findings for

    the entity-level requirements are a testament to the comparability

    of these regulatory systems as we work together in building a strong

    international regulatory framework.

    In addition, we are pleased that the Commission was able to find

    comparability with respect to swap-specific transaction-level

    requirements in the European Union and Japan.

    The Commission attained this benchmark by working cooperatively

    with authorities in Australia, Canada, the European Union, Hong

    Kong, Japan, and Switzerland to reach mutual agreement. The

    Commission looks forward to continuing to collaborate with both

    foreign authorities and market participants to build on this

    progress in the months and years ahead.

    Appendix 3--Dissenting Statement of Commissioner Scott D. O'Malia

    I respectfully dissent from the Commodity Futures Trading

    Commission's (``Commission'') approval of the Notices of

    Comparability Determinations for Certain Requirements under the laws

    of Australia, Canada, the European Union, Hong Kong, Japan, and

    Switzerland (collectively, ``Notices''). While I support the narrow

    comparability determinations that the Commission has made, moving

    forward, the Commission must collaborate with foreign regulators to

    harmonize our respective regimes consistent with the G-20 reforms.

    However, I cannot support the Notices because they: (1) Are

    based on the legally unsound cross-border guidance

    (``Guidance'');\1\ (2) are the result of a flawed substituted

    compliance process; and (3) fail to provide a clear path moving

    forward. If the Commission's objective for substituted compliance is

    to develop a narrow rule-by-rule approach that leaves unanswered

    major regulatory gaps between our regulatory framework and foreign

    jurisdictions, then I believe that the Commission has successfully

    achieved its goal today.

    ---------------------------------------------------------------------------

    \1\ Interpretive Guidance and Policy Statement Regarding

    Compliance with Certain Swap Regulations, 78 FR 45292 (Jul. 26,

    2013).

    ---------------------------------------------------------------------------

    Determinations Based on Legally Unsound Guidance

    As I previously stated in my dissent, the Guidance fails to

    articulate a valid statutory foundation for its overbroad scope and

    inconsistently applies the statute to different activities.\2\ Section

    2(i) of the Commodity Exchange Act (``CEA'') states that the Commission

    does not have jurisdiction over foreign activities unless ``those

    activities have a direct and significant connection with activities in,

    or effect on, commerce of the United States . . .'' \3\ However, the

    Commission never properly articulated how and when this limiting

    standard on the Commission's extraterritorial reach is met, which would

    trigger the application of Title VII of the Dodd-Frank Act\4\ and any

    Commission regulations promulgated thereunder to swap activities that

    are outside of the United States. Given this statutorily unsound

    interpretation of the Commission's extraterritorial authority, the

    Commission often applies CEA section 2(i) inconsistently and

    arbitrarily to foreign activities.

    ---------------------------------------------------------------------------

    \2\ http://www.cftc.gov/PressRoom/SpeechesTestimony/omaliastatement071213b.

    \3\ CEA section 2(i); 7 U.S.C. 2(i).

    \4\ Title VII of the Dodd-Frank Wall Street Reform and Consumer

    Protection Act, Public Law 111-203, 124 Stat. 1376 (2010).

    ---------------------------------------------------------------------------

    Accordingly, because the Commission is relying on the legally

    deficient Guidance to make its substituted compliance determinations,

    and for the reasons discussed below, I cannot support the Notices. The

    Commission should have collaborated with foreign regulators to agree on

    and implement a workable regime of substituted compliance, and then

    should have made determinations pursuant to that regime.

    Flawed Substituted Compliance Process

    Substituted compliance should not be a case of picking a set of

    foreign rules identical to our rules, determining them to be

    ``comparable,'' but then making no determination regarding rules that

    require extensive gap analysis to assess to what extent each

    jurisdiction is, or is not, comparable based on overall outcomes of the

    regulatory regimes. While I support the narrow comparability

    determinations that the Commission has made, I am concerned that in a

    rush to provide some relief, the Commission has made substituted

    compliance determinations that only afford narrow relief and fail to

    address major regulatory gaps between our domestic regulatory framework

    and foreign jurisdictions. I will address a few examples below.

    First, earlier this year, the OTC Derivatives Regulators Group

    (``ODRG'') agreed to a number of substantive understandings to improve

    the cross-border implementation of over-the-counter derivatives

    reforms.\5\ The ODRG specifically agreed that a flexible, outcomes-

    based approach, based on a broad category-by-category basis, should

    [[Page 78898]]

    form the basis of comparability determinations.\6\

    ---------------------------------------------------------------------------

    \5\ http://www.cftc.gov/PressRoom/PressReleases/pr6678-13.

    \6\ http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/odrgreport.pdf. The ODRG agreed to six understandings.

    Understanding number 2 states that ``[a] flexible, outcomes-based

    approach should form the basis of final assessments regarding

    equivalence or substituted compliance.''

    ---------------------------------------------------------------------------

    However, instead of following this approach, the Commission has

    made its comparability determinations on a rule-by-rule basis. For

    example, in Japan's Comparability Determination for Transaction-Level

    Requirements, the Commission has made a positive comparability

    determination for some of the detailed requirements under the swap

    trading relationship documentation provisions, but not for other

    requirements.\7\ This detailed approach clearly contravenes the ODRG's

    understanding.

    ---------------------------------------------------------------------------

    \7\ The Commission made a positive comparability determination

    for Commission regulations 23.504(a)(2), (b)(1), (b)(2), (b)(3),

    (b)(4), (c), and (d), but not for Commission regulations

    23.504(b)(5) and (b)(6).

    ---------------------------------------------------------------------------

    Second, in several areas, the Commission has declined to consider a

    request for a comparability determination, and has also failed to

    provide an analysis regarding the extent to which the other

    jurisdiction is, or is not, comparable. For example, the Commission has

    declined to address or provide any clarity regarding the European

    Union's regulatory data reporting determination, even though the

    European Union's reporting regime is set to begin on February 12, 2014.

    Although the Commission has provided some limited relief with respect

    to regulatory data reporting, the lack of clarity creates unnecessary

    uncertainty, especially when the European Union's reporting regime is

    set to begin in less than two months.

    Similarly, Japan receives no consideration for its mandatory

    clearing requirement, even though the Commission considers Japan's

    legal framework to be comparable to the U.S. framework. While the

    Commission has declined to provide even a partial comparability

    determination, at least in this instance the Commission has provided a

    reason: the differences in the scope of entities and products subject

    to the clearing requirement.\8\ Such treatment creates uncertainty and

    is contrary to increased global harmonization efforts.

    ---------------------------------------------------------------------------

    \8\ Yen-denominated interest rate swaps are subject to the

    mandatory clearing requirement in both the U.S. and Japan.

    ---------------------------------------------------------------------------

    Third, in the Commission's rush to meet the artificial deadline of

    December 21, 2013, as established in the Exemptive Order Regarding

    Compliance with Certain Swap Regulations (``Exemptive Order''),\9\ the

    Commission failed to complete an important piece of the cross-border

    regime, namely, supervisory memoranda of understanding (``MOUs'')

    between the Commission and fellow regulators.

    ---------------------------------------------------------------------------

    \9\ Exemptive Order Regarding Compliance With Certain Swap

    Regulations, 78 FR 43785 (Jul. 22, 2013).

    ---------------------------------------------------------------------------

    I have previously stated that these MOUs, if done right, can be a

    key part of the global harmonization effort because they provide

    mutually agreed-upon solutions for differences in regulatory

    regimes.\10\ Accordingly, I stated that the Commission should be able

    to review MOUs alongside the respective comparability determinations

    and vote on them at the same time. Without these MOUs, our fellow

    regulators are left wondering whether and how any differences, such as

    direct access to books and records, will be resolved.

    ---------------------------------------------------------------------------

    \10\ http://www.cftc.gov/PressRoom/SpeechesTestimony/opaomalia-29.

    ---------------------------------------------------------------------------

    Finally, as I have consistently maintained, the substituted

    compliance process should allow other regulatory bodies to engage with

    the full Commission.\11\ While I am pleased that the Notices are being

    voted on by the Commission, the full Commission only gained access to

    the comment letters from foreign regulators on the Commission's

    comparability determination draft proposals a few days ago. This is

    hardly a transparent process.

    ---------------------------------------------------------------------------

    \11\ http://www.cftc.gov/PressRoom/SpeechesTestimony/omaliastatement071213b.

    ---------------------------------------------------------------------------

    Unclear Path Forward

    Looking forward to next steps, the Commission must provide answers

    to several outstanding questions regarding these comparability

    determinations. In doing so, the Commission must collaborate with

    foreign regulators to increase global harmonization.

    First, there is uncertainty surrounding the timing and outcome of

    the MOUs. Critical questions regarding information sharing,

    cooperation, supervision, and enforcement will remain unanswered until

    the Commission and our fellow regulators execute these MOUs.

    Second, the Commission has issued time-limited no-action relief for

    the swap data repository reporting requirements. These comparability

    determinations will be done as separate notices. However, the timing

    and process for these determinations remain uncertain.

    Third, the Commission has failed to provide clarity on the process

    for addressing the comparability determinations that it declined to

    undertake at this time. The Notices only state that the Commission may

    address these requests in a separate notice at a later date given

    further developments in the law and regulations of other jurisdictions.

    To promote certainty in the financial markets, the Commission must

    provide a clear path forward for market participants and foreign

    regulators.

    The following steps would be a better approach: (1) The Commission

    should extend the Exemptive Order to allow foreign regulators to

    further implement their regulatory regimes and coordinate with them to

    implement a harmonized substituted compliance process; (2) the

    Commission should implement a flexible, outcomes-based approach to the

    substituted compliance process and apply it similarly to all

    jurisdictions; and (3) the Commission should work closely with our

    fellow regulators to expeditiously implement MOUs that resolve

    regulatory differences and address regulatory oversight issues.

    Conclusion

    While I support the narrow comparability determinations that the

    Commission has made, it was my hope that the Commission would work with

    foreign regulators to implement a substituted compliance process that

    would increase the global harmonization effort. I am disappointed that

    the Commission has failed to implement such a process.

    I do believe that in the longer term, the swaps regulations of the

    major jurisdictions will converge. At this time, however, the

    Commission's comparability determinations have done little to alleviate

    the burden of regulatory uncertainty and duplicative compliance with

    both U.S. and foreign regulations.

    The G-20 process delineated and put in place the swaps market

    reforms in G-20 member nations. It is then no surprise that the

    Commission must learn to coordinate with foreign regulators to minimize

    confusion and disruption in bringing much needed clarity to the swaps

    market. For all these shortcomings, I respectfully dissent from the

    Commission's approval of the Notices.

    [FR Doc. 2013-30977 Filed 12-26-13; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: December 27, 2013



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